The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Bangladesh's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of this review makes available to Bangladesh an amount equivalent to SDR 33.67 million (about US$49.7 million), bringing total disbursements to SDR 316.73 million (about US$467.4 million).

The Board also decided today to extend the current PRGF arrangement to June 19, 2007, to allow the remaining sixth review under the arrangement to be completed. In addition the Board agreed to waive the nonobservance of a quantitative performance criterion and a structural performance criterion.

The IMF's Executive Board approved Bangladesh's three-year PRGF arrangement on June 20, 2003 (see Press Release No. 03/92) for an amount equivalent to SDR 347 million (about US$512 million). The Board also approved on July 28, 2004, Bangladesh's request for activation of the newly created Trade Integration Mechanism with an augmentation of the PRGF arrangement amounting to SDR 53.33 million (about US$78.7 million—see Press Release No. 04/161). As a result, the total amount under the PRGF arrangement increased to SDR 400.33 million (about US$590.7 million).

"Bangladesh's economy continues to perform strongly under the PRGF-supported program. Sustained growth with moderate inflation has contributed to a significant reduction in poverty over the last five years, and considerable progress has been achieved toward meeting the Millennium Development Goals. Nevertheless, Bangladesh still faces formidable challenges in addressing infrastructure constraints and improving social services, and the authorities will need to maintain sound policies, speed up the pace of key structural reforms in the banking and energy sectors, and reinforce their revenue mobilization efforts.

"The improved functioning of the foreign exchange market, including flexible exchange rate adjustments in response to market forces, has helped absorb the shock of higher oil prices and the phase-out of MFA quotas on garments. It has also supported the robust growth of exports and remittance receipts and the gradual increase in international reserves.

"While the overall fiscal position has remained prudent, revenue collection relative to GDP remains one of the lowest in the world. The initial results of revenue reforms are encouraging, but continued revenue mobilization efforts will remain vital to finance Bangladesh's need for infrastructure and enhanced social services while maintaining debt at sustainable levels. This will involve strengthened compliance and enforcement, reduced tax exemptions and incentives, and a broadening of the tax base. Efforts will also be made to improve the implementation capacity of the annual development program and the effectiveness of pro-poor spending.

"Bangladesh Bank's stated policy of gradual monetary tightening while inflationary pressures persist is appropriate. A more active use of open market operations and higher interest rates on treasury and central bank securities will help contain inflation in light of continued strong domestic demand and private credit growth.

"Stepped up reform efforts are needed in the Nationalized Commercial Banks (NCBs) to further enhance financial intermediation and to reduce contingent liabilities. The imminent divestment of Rupali Bank is a positive milestone and should be followed by steps to corporatize the remaining three state banks and hold their managements accountable against performance indicators.

"Fuel price adjustments and recent declines in international prices have helped contain losses in the energy sector. However, it will be important to move towards a full pass-through of international oil prices, combined with targeted safety net programs to mitigate the impact on vulnerable groups. This will also provide room for priority spending on social services and infrastructure." Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.